Investing Psychology – Part 4: Charts uncover behaviour patterns – Dynamic of Gap Filling

October 20, 2020

From our last 3 instalments on Investing Psychology, in this edition, we go deeper into some patterns that occur as a result of group (buyer and seller) dynamics and the collective psychology of investors on the market.

People often look at stock price charts and take it in as what it appears to be at first glance, the history of price movements in the company’s share price over time. With the story of news announcements in the background as context one can add another layer and deduce that price sensitive announcements had an effect on driving prices up or down.

The layer that’s not commonly applied and used in analysis is that charts also represent human behaviour in terms of the psychology of buyers vs sellers.

When you add this lens to charts, you start to see patterns that stock charts tend to form often enough that technical analysis has labels for commonly occurring patterns. Google these and you’ll see what I mean – cup and handle, spinning top, bull flag, ascending triangle. There are some pretty fancy names out there.

From our previous series, we understand that emotions play a big role on the share market.  These emotions result in a tussle of supply and demand and prices fluctuate, telling a whole story.

Human beings tend to be creatures of habit.  And habits tend to repeat themselves, so it stands to reason that chart patterns occur often too.

There is a benefit of chart analysis in addition to all the fundamental in-depth research we do. It helps us attempt to eliminate emotion from investment decision making, by getting a visual data-based read on the emotional drivers of others in the market. 

We believe in being students of the fundamental analysis, as well as chart patterns.  To learn and understand chart patterns is to learn about the psychology behind price movements. 

We plan on picking some useful patterns we see and providing our explanation on them in a series of articles.

Familiarity with chart patterns helps us uncover some big winners in the market by technical analysis and also to come up with a plan of what possible entry points to take positions in companies could be.

For members, let’s take a closer look at one of the patterns of market dynamics that play out often, gap filling.

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